Demat Account: Types, Importance & How to Open

What is Demat Account?

A Demat Account or Dematerialised Account is an electronic account or an online portfolio form that is used to hold securities like bonds, stocks, mutual funds, and ETFs (Exchange-traded Funds). Simply put, a Demat Account records the ownership of securities electronically, which eliminates the need for physical share certificates. With Demat Accounts, traders can easily and safely buy, sell, and transfer securities electronically. In India, Demat Trading was first introduced in 1996 for NSE transactions. According to SEBI guidelines, from 31st March 2019, all shares and debentures of the listed companies have to be dematerialized, so they can carry out transactions in a stock exchange.

Geeky Takeaways:

• Demat Account or Dematerialised Account is an online portfolio form that holds securities and allows investors to buy, sell, and transfer securities by electronic means.
• A Demat Account is important to participate in the modern stock market.
• It simplifies the investment management process and also reduces the risks that come with physical securities.
• A Demat Account also allows investors to freeze some amount or type of their Demat Account securities for a specific time period.
• The documents required to open a Demat Account are PAN Card, Aadhar Card, Address Proof. Passport size photos, and ID Proof.

How to Open a Demat Account?

1. Choose a Depository Participant (DP): The investors have to select a Depository Participant before opening a Demat Account with depositories. A Depository Participant is an agent of Depository. A Depository Participant may be a broker, bank, or financial service company, who is registered with SEBI.

2. Gather required Documents: After selecting the DP, gather all the documents required, as mentioned above (such as PAN Card, Aadhar Card, Passport size Photographs, Proof of Address, etc.).

3. Fill out Account Opening Form: The next step is to get an Account Opening Form from the DP and filling it out. While filling the Account Opening Form, make sure that the details written in the form are the same as written in the added documents.

4. Submit the Documents: After filling out the Account Opening Form, submit it to the DP’s office or through online portal along with the documents required. Before submitting the documents, make sure that every information or detail written in it is accurate.

5. Verification Process: Once the form has been submitted with the documents, the DP will verify them through online verification, in-person verification, or both.

6. Sign Agreement: Once the DP verifies the documents, sign the agreement outlining the terms and conditions of the Demat Account Services with the Depository Participant.

7. Receive DP ID (Demat Account Number): After the Demat Account is opened, you will get a Unique Demat Account Number (DP ID) from the Depository Participant along with other account details.

8. Start Trading: Once your Demat Account is active, start trading in securities like bonds, stocks, ETFs, and mutual funds.

Importance of Demat Account

Demat Account is important because of the following reasons:

1. Convenience: With Demat Account, investors find it convenient to hold and manage securities electronically. They can easily access their holdings, track transactions, and manage their portfolios from anywhere on their devices with just an internet connection.

2. Efficient Trading: Demat Account makes buying and selling of securities efficient and quicker. Investors can trade electronically which reduces the time of transaction and minimise paperwork.

3. Eliminates Physical Certificates: With Demat Account, there is no need for the investors to hold physical share certificates, eliminating the risk of their loss, cost of storage, and damage.

4. Safety and Security: A Demat Account offers the investors, a high-level security and safety for their holdings. When the investors hold their securities in dematerialised form, they are protected against risks like forgery, theft, and physical damage. Besides, there are several strict regulatory rules and safeguards that make sure the integrity of demat account transaction is maintained.

5.Portfolio Diversification: With Demat Account, investors can diversify their investment portfolio by holding different types of securities such as bonds, stocks, ETFs, and mutual funds, in one account.

6. Loan against Securities: Investors can even avail loans against the securities they have held in their accounts. Hence, it becomes convenient for them to easily liquidate their securities without selling them.

7. Access to IPOs and Coporate Actions: The Demat Account holders can participate in IPOs (Initial Public Offerings) and several corporate actions like bonus, dividend, and right issue.

Dematerialisation

A process where the securities held by an investor in physical form are cancelled and an electronic number or entry is given to the investor so that he/she can hold the securities as an electronic balance in their account is known as Dematerialisation. Simply put, Dematerialisation means the holding of securities in electronic form. For Dematerialisation, the investor has to open a Demat Account. In present times, all IPOs (Initial Public Offers) are issued in dematerialised form and more than 90% of a company’s turnover is settled by delivery in Demat Account. As per SEBI, it is compulsory for traders to trade in Demat form for some selected securities only. 

Benefits of Dematerialisation

1. Holding shares in Demat form is just like a bank account, which makes it a convenient process of holding shares. 
2. It reduces paperwork as the shares are held by the investors in electronic form.
3. Under Dematerialisation, a trader can convert the physical shares into electronic form, and shares in electronic form can be converted back into physical form.
4. One can even pledge or mortgage the Demat securities to get loans.
5. As the share certificate is in electronic form, there is no danger of theft, loss, or forgery.
6. It is the responsibility of a broker to credit the correct number of shares in the investor’s account.
7. One can hold securities of different companies in one Demat Account.

Types of Demat Account

There are three types of Demat Account:

1. Regular Demat Account: It is a type of Demat Account which is suitable for Indian resident investors who trade in stock market only for personal investment purpose and need a place to store their securities. Investors can hold different securities electronically such as bonds, stocks, mutual funds, and ETFs. There is an Annual Maintenance Charge (AMC) with a regular Demat Account.

SEBI has introduced a Basic Services Demat Account (BSDA), eliminating or reducing the Annual Maintenance Charge based on the size of the investment. It was introduced especially to help the small-time investors who have to pay high AMC despite of their minimal holdings. The basic motive behind BSDA was to increase more participation from the small investors.

2. Repatriable Demat Account: It is a type of Demat Account which is specifically designed f the Non-Resident Indians (NRIs) who wants to trade in the Indian Stock Market. The NRIs can repatriate their invested funds and earned returns, back to their residence country. However, to open a Repatriable Demat Account, an investor needs to get approval from the Reserve Bank of India. The Repatriable Account holders have to like their Non-resident External Accounts with their Demant Accounts, which allows them to repatriate up to one million US dollars on an annual basis.

3. Non-Repatriable Demat Account: This account is also designed for the Non-Resident Indians (NRIs). But, they cannot repatriate the funds invested and returns earned outside India. Also, unlike Repatriable Demat Account, the investment holders can use this account without the approval from RBI.

Documents Required for a Demat Account

Following are the documents, that an investor must have while opening a Demat Account:

1. Proof of Identity (PoI):

• Aadhaar Card
• Passport
• Voter ID Card
• Driving License
• PAN Card

2. Proof of Address (PoA):

• Aadhaar Card
• Passport
• Voter ID Card
• Driving License
• Utility Bills (electricity bill, telephone bill, etc.)
• Bank Statement
• Rent Agreement (if applicable)

3. Proof of Income (required by some brokers):

• Salary Slips
• Income Tax Returns (ITR)
• Bank Statements

4. Passport Size Photographs: A few passport size photographs are required for verification purpose and opening of Demat Account.

5. Canceled Cheque: Some of the brokers might ask for a canceled cheqe to link the investor’s bank account and Demat Account.

Demutualisation

The separation of ownership and control of stock exchanges from the trading rights of members is known as Demutualisation. Earlier the ownership and control of stock exchanges were in the hands of a broker, which often led to a conflict of interest between the brokers and their clients. To solve this issue, Demutualisation of the Stock Exchange was done by the Government. 

Demutualisation has helped in two ways:

• First of all, it has reduced conflicts of interest between brokers and their clients.
• Secondly, it has reduced the chances of brokers using the stock exchange for their personal gain.

Demat Account – FAQs

Who can open a Demat Account?

Any Indian resident, Non-Resident Indian (NRI), or Overseas Citizen of India (OCI) above 18 years of age can open a demat account.

What are the charges associated with a Demat Account?

Charges associated with a Demat Account include account opening fees, annual maintenance charges (AMC), transaction charges, and other fees levied by the Depository Participant (DP) or broker.

Can I convert my physical shares into electronic form?

Yes, you can convert your physical shares into electronic form through Dematerialisation.

How to access Demat Account?

One can access their Demat Account through the DP’s website or trading platform using your login credentials.

What happens to my demat account if I change my address?

If you change your address, you have to update the new address with the Depository Participant (DP) by submitting a change request form along with required documents for address proof.